NEW LEGAL SOLUTIONS IN THE FIELD OF FINANCIAL TRANSACTIONS
The Law on Financial Collaterals (hereinafter: the Law) that was adopted in an urgent procedure before the National Assembly of the Republic of Serbia on June 8th 2018 and is applicable from January 1st 2019, introduces completely new institutes, with the aim to establish clear rules for contraction, record and enforcement of collaterals in financial transactions.
The current legal solutions that regulate the financial collaterals, contained in the Law on Obligations, the Law on Enforcement and Security and the Law on Pledge were not mutually harmonized and harmonized with international standards. In particular, the Law harmonizes national legislation with the Directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements.
The legal concept of the contract on financial collaterals is introduced for the first time into the financial market of the Republic of Serbia, but only for the qualified subjects, such as the Republic of Serbia, the autonomous province, the local self-government units and other public authorities, the National Bank of Serbia, banks, insurance companies and other financial sector entities, as well as the European Union, the Member States of the European Union, the European Central Bank, The International Monetary Fund and other financial institutions operating in accordance with the regulations of the European Union. Namely, due to the insufficient development of the financial market of the Republic of Serbia and weak economic strength of other subjects, the Law does not stipulate that individuals and legal entities may participate in these financial transactions. Moreover, it is foreseen that a legal entity that concludes a contract on financial collaterals, but it is not authorized to do so, will be fined for a misdemeanor in the amount of RSD 100.000,00 to 2.000.000,00 ( approximately EUR 845 to 16910).
The Law envisages that collateral can be cash, financial instruments and credit claims and the definitions of financial instruments and credit claims are provided. A contract on financial collateral can stipulate that a collateral provider is obliged, in order to secure the execution of its or third party’s financial obligation, to either transfer the collateral to a collateral taker or to establish a pledge in that asset in the interests of a collateral taker. In the first case, a collateral taker may use cash and financial instruments and dispose them as an owner, while in the second case, a collateral taker does not become an owner, but has only a pledge, with the possibility of contracting the right of use and disposal of these funds, so that the financial material is not blocked, which aims to increase the liquidity of the market. Upon execution of the financial obligation, a collateral taker will be obliged to return the received collateral or equivalent to a collateral provider.
One more specificity of this contract is its exclusion from the application of the provisions of the Law on Bankruptcy, meaning that the rights and obligations under the contract, including the granting, acquisition, change and enforcement of the collateral, may be implemented regardless of the initiation/opening and implementation of the bankruptcy, liquidation and measures of reorganization towards the provider/taker of collateral. To this end, the Law on Bankruptcy has been aligned with this Law. Also, if a contract on financial collateral is concluded, or a collateral is given, acquired or amended before rendering a decision on these procedures, the provisions of the contract, as well as the acts concerning collaterals cannot be determined null and void. If the contract is concluded or the collateral is given, acquired or changed on the day or after the adoption of an appropriate decision (on bankruptcy, etc.), these legal transactions will be legally valid and binding if the collateral taker proves that it did not know, nor was it required to know about the initiation/opening of this procedure or the application of measures.
Finally, the provisions of the Law on Bankruptcy related to the challenge of legal transactions of a recipient or collateral taker, over which the bankruptcy is opened, will be applicable if they are not contrary to this Law. Moreover, monetary assets and financial instruments on which the pledge right has been established in accordance with this Law are exempt from execution in the sense of the Law on Enforcement and Security.
Collateral enforcement can be carried out in situations that are freely agreed by the parties, such as failure to fulfill a due obligation or the existence of any of the bankruptcy grounds on a side of a collateral provider or taker. Enforcement of a collateral can be executed by extra-judicial means, without the consent of the court or other body, without public auction, immediately after an occurrence of situation agreed as a condition for the collateral enforcement, without leaving an additional deadline or providing a prior notice.
Another novelty introduced by the Law is the possibility of agreeing on close-out-net, which implies that mutual obligations under one or more financial contracts will become due early and the calculation of those obligations at current market value will be carried out in order to narrow down to the net amount of one party’s obligation to the other. The netting will be performed automatically or at the request of the one party when the conditions for the enforcement of the collateral occur. The initiation/opening of a bankruptcy procedure over the provider or collateral taker does not affect the implementation of netting. Netting can be applied not only to financial collateral arrangements, but also to other qualified financial contracts, such as a financial derivative contract, a contract on the purchase/sale of collaterals and other contracts established on the list published by the National Bank of Serbia, provided that that they are concluded between qualified entities.
It is envisaged that the transfer of financial instruments and establishment of pledge over collaterals will be recorded and regulated by the Central Securities Depository.
The provisions of the new Law provide certain certainty and benefits to the qualified subjects that can conclude financial collateral arrangements, while on the other hand natural and legal entities that do not fall under the qualified subjects continue to contract collaterals in accordance with existing legal provisions.
Attorney at law Damir Petrović
The information contained herein have been provided only for the purpose of general information and cannot be considered as a legal opinion or legal advice. Accordingly, the Law Firm Petrović Mojsić & Partners disclaims all responsibility and accept no liability in respect to actions taken or not taken based on any or all the contents contained herein.